If you haven’t read Reminiscences of a Stock Operator, don’t bother showing up to a job interview with Mike Novogratz, the fabled co-founder of $47 billion New York-based hedge fund giant Fortress Investment Group. The 1923 novel about an early Wall Street trader is regarded by many at the top hedge funds as a timeless trading manual.

For Novogratz, the colourful ex-Goldman Sachs trader and former navy helicopter pilot, it’s an indicator that whoever has read the book shares his intense passion for playing the global markets.

In today’s trading environment, the keenest of traders are spending more time reading about Australia. By virtue of the free-floating exchange rate, high rate settings and delicate position of the Australian economy at the pointy end of the commodities super cycle, the country has become a haven for speculators.

“Australia has been a region that punches above its weight in terms of the importance of its currency market as a casino of the world," says Novogratz, who is talking all matters macro at Citigroup’s annual investment conference in Sydney this week.

“In reality, the volume of AUD that is traded relative to the size of the economy is crazy, but because of it you have developed a strong trading culture."

Fortress, founded in 1998, was among the first alternative asset management firms to list on the New York Stock Exchange, with investment funds dedicated to private equity, distressed debt and credit. It has $US47 billion of funds under management.

Novogratz, who is considered among the elite of Wall Street hedge fund managers, is the founder of Fortress’ hedge fund business and co-chief investment officer of the Fortress Macro Fund, which manages $US2.4 billion of assets. After a tough few years, the former wrestling champion is back on top, clocking a 12 per cent return through to September.

Macro hedge funds aim to make money be analysing large-scale political, economic and market trends and predicting their effects on asset prices. They’re among the most challenging funds to manage because the best macro funds are expected to deliver returns regardless of prevailing market conditions. Or, in the words of the founder of the world’s largest macro fund, Ray Dalio of Bridgewater, they should be “all-weather".

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Novogratz’s key insight over the past 12 months was not to underestimate the political will of policymakers to save Europe’s single currency. “The world is still a little bit complicated but less complicated than five months ago," he says.

“What [European Central Bank chief Mario] Draghi did in Europe is stunningly important. The Europeans are well on their way to putting in the institutions that take away the risk that it goes to a real crisis – in the vernacular really reducing the tail risk," he says.

That doesn’t mean that all is right in the Western economies – just that markets will be driven by the cyclical economic risks, not the remote, albeit real, probability of economic catastrophe.

As markets gain comfort that Europe is not about to vanish into the ocean, Novogratz expects to see “a normalisation of the panic premium".

That shift may be evident in the most recent trading sessions, where safe haven bonds have been sold off heavily, resulting in a rise in yields of US, UK and Australian bonds. The Aussie dollar has already rallied as investors tentatively re-embrace risk assets.

CHINA BEAR

While Novogratz is more confident that US and European markets will find more stable footing, he’s less sure China won’t ultimately disappoint investors and impact the Australian economy.

“China is not going to grind to a halt but they are a long way through their infrastructure build and India is not picking up the slack," he said.

“I think the structural story in China is not a positive one, in that you are shifting away from a 70 per cent capex driven and 30 per cent consumer driven economy. The 70 per cent will get slower more quickly than the 30 per cent will get faster – the net of that is lower growth. This will weigh on Australia, not in the next six weeks but certainly over the next two years."

China and Europe are two of the three issues taxing the minds of the macro funds – the third is the potential for political grid-lock to disrupt America’s economic recovery.

US ELECTION

Novogratz doesn’t have a whole lot of faith in US politicians on either side and likened the second presidential election debate to an argument between “petulant fourth graders". But he’s hopeful that the end of the election will bring about more co-operation among US politicians, especially with the pending “fiscal cliff", whereby politicians must reach new tax and spending agreements to avoid a massive contraction in government funds to the private sector.

Still, the risk that an impasse regarding the fiscal cliff roils markets and tips the US into recession is a real one in the current political climate and neither Novogratz nor the broader market is complacent.

Another curve ball for markets could be whether Republican
Mitt Romney
wins the election and delivers on plans to appoint a Federal Reserve chairman official that will not pursue quantitative easing. But Novogratz says that whoever succeeds current Fed chairman
Ben Bernanke
will find it difficult to “turn off the free money pump".

“Once the guy is in the seat, easy money looks a lot nicer than when you are not," he says.

If there is an abrupt U-turn in Fed policy, it could create the violent and volatile conditions that hedge funds trade on. The irony is that despite deep political and economic global uncertainty, markets have generally not been volatile.

“The last time volatility was this low, people gathered in Jackson Hole for the annual conference in 2006 and talked about ‘the great moderation’ and that this is a structurally new world because of financial innovation, synchronised business cycles, independent central banks and inflation targeting being a religion," he says. “For all of those reasons everyone believed it was different this time and they then looked like fools two years later when the world blew up."

NEW SOURCES OF VOLATILITY

Today, market volatility is low for altogether different reasons.

“Unbelievable amounts of intervention from central banks, intervention in bond markets in the US and Europe, and currency markets in the developing world have lowered volatility in the rest of the world – that, coupled with financial deleveraging as hedge funds have less leverage and banks have a lot less leverage, has hurt liquidity and volatility," he says.

For that reason Australia, which has generally resisted the urge to intervene and fight market forces, has been an interesting and more active market to trade for macro funds.

“It’s something for the world to think about as to whether we have a fair system when seven of the 10 largest Asian countries peg their currency and all that relief comes to Australia," he says.

“I personally think Australia has it right and the Chinese and Koreans have it wrong. The strong currency when you have a strong economy is a wonderful thing; it makes you richer, you can travel and import more and your citizens are wealthier. You shift business up the food chain in terms of productivity because you can’t compete on low wages."